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Microfinance Focus, January 17, 2012: Bob Annibale is Global Director of Citi Microfinance and Community Development. He leads Citi’s commercial relationships with microfinance institutions, networks and investors across the globe. Bob also represents Citi on the Board of the Microfinance Information Exchange, the Council of Microfinance Equity Funds, the SEEP Network, the Microfinance Network and the Executive Committee of CGAP (World Bank).

In an exclusive interview with Microfinance Focus, Bob spoke about the vision of Citi Microfinance for the global microfinance sector.

The interview was first published in Microfinance Focus special print magazine which was distributed at the Global Microcredit Summit 2011 in Spain.

Microfinance Focus: How do you see the investment environment changing over the next few years? Is it going to be different from what it has been?

Bob Annibale: Many factors contribute to changes in the investment landscape, particularly recent global events in the equity and sovereign debt markets and slow economic growth in the U.S., Europe and Japan. In this challenging and complex global environment, microfinance is confronting additional challenges, such as the impact of rising fuel and food prices on their clients, continued income inequalities and the need for funders – philanthropic, public and commercial – to continue to invest in the growth of the sector.

As outreach and growth have been pursued in a number of markets, the scaling of microfinance has been accompanied by similar challenges and trends as in the wider financial sector, including competition, sales and collections practices; the need for greater transparency in product pricing and features; the integration of the sector with credit bureaus; and appropriate regulations and supervision.

In recent calendar quarters, growth has slowed in many countries or regions. Though there may indeed be a slowing in the pace of growth in microfinance investment funds, in some countries this may also be in response to changes in customer needs and demand. While the capacity of for-profit and non-profit investors, specialized funds and institutional investors continues to grow, microfinance institutions [MFIs] must recognize that many donors and investors are focusing on a broader agenda that goes beyond financial access to include financial capability and varying degrees of social impact.

Microfinance Focus: Do you believe in the debate of social interest vs. commercial interest? Or they can be both on the same side?

Bob Annibale: Rather than reduce the microfinance sector to a simple dichotomy of ‘social vs. commercial,’ we believe that it will take all kinds of institutions – for-profit, mutual societies, non-profit, etc. — to achieve significant expansion of responsible financial services. Most microfinance institutions, regardless of legal vehicle or ownership structure, began as non-profits. The ability of institutions to grow and reach those whom they seek to serve has required many to raise capital, usually including social investors, international development agencies, and specialist fund investors.

There are many examples of how institutions of all types are part of this important movement, from non-profit and cooperatives to non-bank finance companies and specialized microfinance banks. The regulatory context is an important influence on how the microfinance sector in a country evolves. Success as measured by meeting client needs, however, depends not on the type of institutions, but rather on how well they focus and understand the needs, capability and capacity of those they serve.

Citi Microfinance engages all of Citi’s global businesses to support microfinance sector clients with appropriate products, distribution mechanisms and financing. We seek to broaden and increase the scale and outreach of financial services through such partnerships. We work closely with microfinance institutions and networks as clients and partners as they have the greatest experience, outreach and trust in the communities that they serve.

Bob Annibale: Events in India — specifically in Andhra Pradesh — and their impact on the country’s wider microfinance, non-profit and for-profit sectors provide an opportunity to reflect on the challenges of rapid growth, the ongoing need to also focus on financial education not just access, the absence of integrated credit bureaus, and the need for clarity in the regulatory and supervisory context of India, a complex federal system with both state and federal regulators and tensions.

India’s and international microfinance networks, leaders and investors are providing strategic input and a sense of urgency for advancing the need for common industry standards, regulatory and supervisory clarity, and a reemphasis on the need to be more client-centric and to assess social impact. In India, microfinance has brought tens of millions of people formal financial access for the first time, but one observation is the need to ensure that the supporting infrastructure is in place, including financial education.

In India and around the world, financial inclusion remains an imperative for economic growth, at both the community and national levels, and microfinance is an important contributor to expanding outreach. Globally, Citi’s commitment to responsible finance is reflected in our focus on financial inclusion, through the philanthropic work of the Citi Foundation and through Citi Microfinance and our businesses.

Microfinance Focus: What are some of the risks that you think an investor needs to see in some of the fast growing microfinance markets?

Bob Annibale: Recent situations highlight the need to focus on the client and the market, especially with regard to the evolution of the MFI footprint; the development of the competitive landscape; the performance of data and impact assessments; and the decision to make changes in business models. The most recent Microfinance Banana Skins Survey, published in January 2011, reflects the sector’s continued growth and evolution yet also highlights the need for increased focus on clients’ needs and related credit risks. In contrast, institutional risks dominated the attention of respondents in earlier surveys.

Microfinance Focus: Andhra Pradesh is just one state of India? Do you think investors acted responsibly when they nearly froze the funding for MFIs across the nation?

Bob Annibale: Investors and donors have a responsibility to all stakeholders. Some lenders’ response to the uncertainties created by the Andhra Pradesh (AP) situation — to restrict new disbursements while awaiting regulatory guidance and clarity — should be viewed in the context of the preceding period’s significant growth. The positive developments since the AP Government’s October 2010 intervention have provided more certainty along with new disbursements of lending and capital investment, but it will take time to restore confidence fully and for institutions to make the necessary changes to support growth within the changed paradigm. Elsewhere in the world we continue to see microfinance institutions expand and evolve, including in Indonesia, Bangladesh, Mexico, Peru, and other countries.

Microfinance Focus: What is more important for Citi – measuring risk or measuring social impact?

Bob Annibale: Citi’s view of risk is holistic and involves our understanding of our clients and the environments in which they operate. Our MFI clients around the world –- more than 100 institutions in approximately 40 countries –- represent a broad spectrum. They differ in the ways they have evolved; their local regulatory and market contexts; and the clients that they serve, so we make sure to understand not only their business and operating models but also their stated and reported financial inclusion principles, client profiles, impact and objectives. Of course, we also track their performance.

We are very encouraged by the work that is becoming more available on social impact assessing, by both academic and industry specialists, including some of the microfinance specialized rating agencies. Such tools will help us to assess an institution’s value to its clients and community, which are important factors in our risk process.

Our work to expand financial inclusion includes building financial literacy, including the skills and knowledge needed to make best use of the products and services offered by MFIs and others. Financial capacity-building is one of the major components of the Citi Foundation’s support in the sector, as this combines financial education with access.

Microfinance Focus: Tell us how Citi assess impact on the end client?

Bob Annibale: We work with a wide range of financial intermediaries, from small non-profits to large, regulated financial institutions, to reach our end clients. These intermediaries have different ways to build client understanding and to assess and monitor client needs. We and many others in the investment community consider institutional metrics provided by MFIs but we understand that historically these have focused heavily on portfolio quality and outreach. We also analyze a number of the social impact evaluations and ratings that have been introduced. We recognize that better end-client portfolio metrics are needed in order to assess and monitor client vulnerability and over-indebtedness properly.

We have seen that MFIs’ portfolio and reputation problems often result from a lack of appreciation for the pressures on and behaviours of end-clients. Given the realities of the new world in which these clients operate, we must understand and monitor the composition and stress level of MFIs’ client portfolios and assess whether the MFIs have appropriate client assessment processes in place.

Microfinance Focus: Where do you see the next big microfinance market emerging?

Bob Annibale: Providing access to finance for unbanked and underserved populations is a high priority on most governments’ agendas. Financial inclusion in turn fuels economic growth through micro and small enterprises. As the economies of the Middle East and North Africa stabilize, we see significant new demand for financial access in these regions. The important microfinance market that has been poised for huge growth is China, although — as with Brazil — this could prove to be a more bank-led growth. Subject to accommodative regulatory change, China continues to have exciting potential with significant rural and low-income community needs.

Microfinance Focus: On which regions will Citi Microfinance focus this year? What are some of the new product or investments that Citi is working on?

Bob Annibale: Citi works with the sector through our local businesses yet our focus reflects our global franchise presence in more than 100 countries. The Middle East, North Africa and China are definitely high priorities for us, and we will build off of our extensive local presence in Latin America and Asia.

We also seek opportunities in markets like Indonesia, where financial access is limited. We recently closed a funding transaction with Bank Danamon, one of the largest institutions active in microfinance. There also are some large markets where we already have a strong footprint and are looking for innovative ways to deepen our involvement, such as Mexico. There also are significant unbanked and underserved communities in the United States and we have some very interesting partners and initiatives there too, particularly for savings and asset building.

At Citi, we continually look for innovative solutions to tailor our existing products to our wide variety of clients and partner MFIs and to specialized banks, microfinance funds and donors. Mobile banking and prepaid cards are areas where Citi has a significant presence and we are working to extend our exiting platforms to MFIs. We also work with our global clients to develop innovative ways to scale up the funding and banking of sustainable small producer agribusinesses.